Section II. What Determines the Quantity in Which Commodities Exchange for One Another

When a certain quantity of one commodity is exchanged for a certain quantity of another commodity; a certain quantity of cloth, for example, for a certain quantity of corn; there is something which determines the owner of the cloth to accept for it such and such a quantity of corn; and, in like manner, the owner of the corn to accept such and such a quantity of cloth.

This is, evidently, the principle of demand and supply, in the first instance. If a great quantity of corn comes to market to be exchanged for cloth, and only a small quantity of cloth to be exchanged for corn, a great quantity of corn will be given for a small quantity of cloth. If the quantity of cloth, which thus comes to market, is increased, without any increase in the quantity of corn, the quantity of corn which is exchanged for a given quantity of cloth will be proportionally diminished.

This answer, however, does not resolve the whole of the question. The quantity in which commodities exchange for one another depends upon the proportion of supply to demand. It is evidently therefore necessary to ascertain upon what that proportion depends. What are the laws according to which supply is furnished to demand, is one of the most important inquiries in Political Economy.

Demand creates, and the loss of demand annihilates, supply. When an increased demand arises for any commodity, an increase of supply, if the supply is capable of increase, follows, as a regular effect. If the demand for any commodity altogether ceases, the commodity is no longer produced.

The connexion here, or causes and effects, is easily explained. If corn is brought to market, the cost of bringing it has been so much. If cloth is brought to market, the cost of bringing it has been so much. For the benefit of simplicity, the number of commodities in the market is here supposed to be two: it is of no consequence, with regard to the result, whether they are understood to be few or many.

The cost of bringing the corn to market has been either equal to that of bringing the cloth, or unequal. If it has been equal, there is no motive, to those who bring the cloth or the corn, for altering the quantity of either. They cannot obtain more of the commodity which they receive in exchange, by transferring their labour to its production. If the cost has been unequal, there immediately arises a motive for altering the proportions. Suppose that the cost of bringing the whole of the corn has been greater than that of bringing the whole of the cloth; and that the whole of the one is exchanged against the whole of the other, either at once, or in parts: the persons who brought the cloth have in that case possessed themselves of a quantity of corn at less cost, than that at which it was brought to market, by those who produced it; those, on the other hand, who brought the corn have possessed themselves of a quantity of cloth, at a greater cost than that at which it can be made and brought to market.

Here motives arise, to diminish the quantity of corn, and increase the quantity of cloth; because the men who have been producing corn, and purchasing cloth, can obtain more cloth, by transferring their means of production from the one to the other. As soon, again, as no more cloth can be obtained by applying the same amount of means to the production of cloth, than by applying them to corn, and exchanging it for cloth, all motive to alter the quantity of the one as compared with that of the other is at an end. Nothing is to be gained by producing corn rather than cloth, or cloth rather than corn. The cost of production on both sides is equal.

It thus appears that the relative value of commodities, or in other words, the quantity of one which exchanges for a given quantity of another, depends upon demand and supply, in the first instance; but upon cost of production, ultimately; and hence, in accurate language, upon cost of production, entirely. An increase or diminution of demand or supply, may temporarily increase or diminish, beyond the point of productive cost, the quantity of one commodity which exchanges for a given quantity of another; but the law of competition, wherever it is not obstructed, tends invariably to bring it to that point, and to keep it there.

Cost of production, then, regulates the exchangeable value of commodities. But cost of production is itself involved in some obscurity.

Two instruments are commonly combined in production; Labour and Capital.

It follows, either that cost of production consists in labour and capital combined; or that one of these may be resolved into the other. If one of them can be resolved into the other, it follows that cost of production does not consist in both combined.

The opinion, which is suggested by first appearances, undoubtedly is, that cost of production consists in capital alone. The capitalist pays the wages of his labourer, buys the raw material, and expects that what he has expended shall be returned to him, in the price, with the ordinary profits upon the whole of the capital employed. From this view of the subject, it would appear, that cost of production consists exclusively in the portion of capital expended, together with the profits upon the whole of the capital employed in effecting the production.

It is easy, however, to see, that in the term capital, thus understood, an ambiguity, and hence a fallacy, is involved. When we say that capital and labour, the two instruments of production, belong to two classes of persons; we mean that the labourers have contributed so much to the production, and the capitalists so much; and that the commodity, when produced, belongs in certain proportions to both. It may so happen, however, that one of these parties has purchased the share of the other, before the production is completed. In that case, the whole of the commodity belongs to the party who has purchased the share of the other. In point of fact, it does happen, that the capitalist, as often as he employs labourers, by the payment of wages, purchases the share of the labourers. When the labourers receive wages for their labour, without waiting to be paid by a share of the commodity produced, it is evident that they sell their title to that share. The capitalist is then the owner, not of the capital only, but of the labour also. If what is paid as wages is included, as it commonly is, in the term capital, it is absurd to talk of labour separately from capital. The word capital, as thus employed, includes labour and capital both. To say, therefore, that the exchangeable value of commodities is determined by capital, understood in this sense, is to say that it is determined by labour and capital combined. This, however, is returning to the point from which we set out. It is nugatory to include labour in the definition of the word capital, and then to say that, capital without labour, determines exchangeable value. If capital is understood in a sense which does not include the purchase money of labour, and hence the labour itself, it is obvious that capital does not regulate the exchangeable value of commodities.

If labour were the sole instrument of production, and capital not required, the produce of one day's labour in one commodity would exchange against the produce of one day's labour in another commodity. In the rude state of society, if the hunter and the fisherman desired to vary their food, the one by a portion of game, the other by a portion of fish, the average quantity which they took in a day would form the standard of exchange. If it did not, one of the two would be placed in a more unfavourable situation than his neighbour, with perfect power, which he would of course employ, to pass from the one situation to the other.

In estimating equal quantities of labour, an allowance would, of course, be included for different degrees of hardness and skill. If the products of each of two days' labour of equal hardness and skill exchanged for one another, the product of a day's labour, which was either harder, or required a greater degree of skill, would exchange for something more.

All capital consists really in commodities. The capital of the farmer is not the money which he may be worth, because that he cannot apply to production. His capital consists in his implements and stock.

As all capital consists in commodities, it follows, of course, that the first capital must have been the result of pure labour. The first commodities could not be made by any commodities existing before them.

But if the first commodities, and of course the first capital, were the result of pure labour, the value of this capital, the quantity of other commodities for which it would exchange, must have been estimated by labour. This is an immediate consequence of the proposition which we have just established, that where labour was the sole instrument of production, exchangeable value was determined by the quantity of labour which the production of the commodity required.

If this be established, it is a necessary consequence, that the exchangeable value of all commodities is determined by quantity of labour.

The first capital, as has just been seen, being the result of pure labour, bears a value in proportion to that labour. This capital concurs in production. And it is contended that as soon as capital concurs in production, the value of the commodity produced is determined by the value of the capital. But the value of that capital itself, we have just observed, is determined by labour. To say, therefore, that the value of a product is determined by the value of the capital, is of no use, when you have to go beyond the value of the capital, and ask, what it is by which that value is itself determined. To say that the value of the product is determined by the value of the capital, but the value of the capital is determined by the quantity of labour, is to say that the value of the product is determined by the quantity of labour.

It thus undeniably appears, that not only the value of the first capital, but, by equal necessity, that of the commodities which are produced by the first capital, is determined by quantity of labour. Capital of the second stage must consist in the commodities which are produced by that of the first stage. It must, therefore, be estimated by the quantity of labour. The same reasoning applies to it in every subsequent stage. The value of the first capital was regulated by quantity of labour: the value of that which was produced by the first capital was regulated by the value of the first: that, however, was valued by labour: the last, therefore, is valued by labour; and so on, without end, as often as successive productions may be supposed to be made. But, if the value of all capital must be determined by labour, it follows, upon all suppositions, that the value of all commodities must be determined by labour.

To say, indeed, that the value of commodities depends upon capital, implies one of the most obvious of all absurdities. Capital is commodities. If the value of commodities, then, depends upon the value of capital, it depends upon the value of commodities; value in short depends upon value. This is not an exposition of value. It is an attempt clearly and completely abortive.

It thus appears, that quantity of labour, in the last resort, determines the proportion in which commodities exchange for one another.

There is one phenomenon which is brought to controvert these conclusions, and which it is, therefore, necessary to explain.

It is said that the exchangeable value of commodities is affected by time, without the intervention of labour; because, when profits of stock must be included, so much must be added for every portion of time which the production of one commodity requires beyond that of another. For example, if the same quantity of labour has produced in the same season a cask of wine, and 20 sacks of flour, they will exchange against one another at the end of the season: but if the owner of the wine places the wine in his cellar, and keeps it for a couple of years, it will be worth more than the 20 sacks of flour, because the profits of stock for the two years must be added to the original price. Here is an addition of value, but here it is affirmed, there has been no new application of labour; quantity of labour, therefore, is not the principle by which exchangeable value is regulated.

This objection is founded upon a misapprehension with respect to the nature of profits. Profits are, in reality, the measure of quantity of labour; and the only measure of quantity of labour to which, in the case of capital, we can resort. This can be established by rigid analysis.

If two commodities are produced, a bale of silk, for example, for immediate consumption, and a machine, which is an article of fixed capital; it is certain, that if the bale of silk and the machine were produced by the same quantity of labour, and in the same time, they would exactly exchange for one another: quantity of labour would clearly be the regulator of their value.

But suppose that the owner of the machine, instead of selling it, is disposed to use it, for the sake of the profits which it brings; what is the real character and nature of his action? Instead of receiving the price of his machine all at once, he takes a deferred payment, so much per annum: he receives, in fact, an annuity, in lieu of the capital sum; an annuity, fixed by the competition of the market, and which is therefore an exact equivalent for the capital sum. Whatever the proportion which the capital sum bears to the annuity, whether it be ten years' purchase, or twenty years' purchase, such a proportion is each year's annuity of the original value of the machine. The conclusion, therefore, is incontrovertible: as the exchangeable value of the machine, had it been sold as soon as made, would have been the practical measure of the quantity of labour employed in making it, one-tenth or one-twentieth of that value measures also a tenth or a twentieth of the quantity of labour.

If a piece of machinery, which has cost 100 days' labour, is applied in making a commodity, and is worn out in the making of it; and if 100 days' pure labour are employed in making another commodity; the produce of the machine, and the produce of the labour, supposing no adjustment necessary for difference of time, will exchange against one another.

Make now a different supposition: that the machine is an article of fixed capital, and not worn out, and let us trace the consequences. It was correctly supposed, in the former case, that 100 days' labour were expended by wearing out the machine; but 100 days' labour have not been expended in the second, because the machine is not worn out. Some labour, however, has been expended, because 100 days' labour in a mass has been applied. How much of it shall we say has been expended? We have an exact measure of it in the equivalent which is paid. If the equivalent which was obtained when the machine was worn out, was a measure of 100 days' labour, whatever proportion of such equivalent is received as a year's use of the machine when not worn out, must represent a corresponding proportion of the labour expended upon the machine.

Capital is allowed to be correctly described under the title of hoarded labour. A portion of capital produced by 100 days' labour, is 100 days' hoarded labour. But the whole of the 100 days' hoarded labour is not expended, when the article constituting the capital is not worn out. A part is expended, and what part? Of this we have no direct, we have only an indirect measure. If capital, paid for by an annuity, is paid for at the rate of 10 per cent, one-tenth of the hoarded labour may be correctly considered as expended in one year.

The instance which is commonly adduced as exemplifying the supposed fact of an increase of value without increase of labour, is that of wine. Wine acquires a greater value by being merely deposited in the cellars of the merchant.

But they who would advance this, as an answer to the antecedent reasoning, do not perceive the force of their own objection. Their doctrine is, that exchangeable value is regulated by cost of production. Cost of production is the outlay necessary for completing the product. When the wine was put into the cellar, it was worth so much, according to the capital expended in its production. When it is placed in the cellar, no more capital is employed upon it, nor any more labour; and yet it acquires an additional value. The question, why it acquires more value, when there is not more capital, is just as difficult, as why it acquires more value, when there is not more labour.

It is no solution to say, that profits must be paid; because this only brings us to the question, why must profits be paid? To this there is no answer but one, that they are the remuneration for labour; labour not applied immediately to the commodity in question, but applied to it through the medium of other commodities, the produce of labour. Thus a man has a machine, the produce of 100 days' labour. In applying it, the owner undoubtedly applies labour, though in a secondary sense, by applying that which could not have been had but through the medium of labour. This machine, let us suppose, is calculated to last exactly 10 years. One tenth of the fruits of 100 days' labour is thus expended every year; which is the same thing in the view of cost and value, as saying that 10 days' labour have been expended. The owner is to be paid for the 100 days' labour which the machine costs him, at the rate of so much per annum, that is, by an annuity for ten years, equivalent to the original value of the machine. It thus appears that profits are simply remuneration for labour. They may, indeed, without doing any violence to language, hardly even by a metaphor, be denominated wages: the wages of that labour which is applied, not immediately by the hand, but mediately, by the instruments which the hand has produced. And if you may measure the amount of immediate labour by the amount of wages, you may measure the amount of secondary labour by that of the return to the capitalist. We surely have not occasion to add, that if this be the general account of profits, which seems undeniable, it is applicable to all particular cases, to that of wine in the cellar, as well as to every other. Suppose that 100 men make a machine in one day, that another 100 men employ this machine the next day, and wear it out; the first 100 men, and the second 100 men, will divide the produce equally between them. The share of the first 100 men is payment for capital, no doubt, but it is also, most obviously, payment for labour too; and in whatever degree labour is productive, that is, yields more than is consumed in effecting the product, to that degree an advantage is afforded beyond the replacing of the capital consumed, and constitutes profit.

The return which is made to capital employed upon the land, is that which determines the rate of annual profit from all other employments of capital; and, of course, for that which is employed in meliorating wine in a wine-cellar. The case of the wine in the cellar coincides exactly with that of a machine worn out in a year, which works by itself without additional labour. The new wine, which is one machine, is replaced by its produce, the old wine, with that addition of value which corresponds with the return to capital employed upon the land; and the account which is to be rendered of the one return, is also the true account of the other.